1. Question the Other Day…
“How do you pick the Terminal Multiple to use in a DCF when you’re calculating Terminal Value?”
Common Answer: Look at the multiples for the company’s set of comparable public companies, and use something in that range
Real Answer: More complicated than that…

2. 3 Main Problems with Comps
Multiples often decline as growth slows down – investors won’t pay 50x revenue for a mature manufacturer, but they might for a tech startup
The Terminal Multiple must also imply a reasonable Terminal Growth Rate… yes, you can calculate the Growth Rate implied by a Terminal Multiple
It’s more about the range of values, not a specific multiple from the set

3. The Implied Growth Rate
Terminal Value =
Final Year FCF * (1 + FCF Growth Rate)
(Discount Rate – FCF Growth Rate)
Terminal Value * (Discount Rate – FCF Growth Rate) = Final Year FCF * (1 + FCF Growth Rate)
Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate =
Final Year FCF + Final Year FCF * FCF Growth Rate

4. The Implied Growth Rate
Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate =
Final Year FCF + Final Year FCF * FCF Growth Rate
Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate – Final Year FCF – Final Year FCF * FCF Growth Rate = 0
– Terminal Value * FCF Growth Rate – Final Year FCF * FCF Growth Rate = – Terminal Value * Discount Rate + Final Year FCF

5. The Implied Growth Rate
– Terminal Value * FCF Growth Rate – Final Year FCF * FCF Growth Rate = – Terminal Value * Discount Rate + Final Year FCF
FCF Growth Rate * (–Terminal Value – Final Year FCF) = – Terminal Value * Discount Rate + Final Year FCF
FCF Growth Rate * (Terminal Value + Final Year FCF) = Terminal Value * Discount Rate – Final Year FCF

6. The Implied Growth Rate
FCF Growth Rate * (Terminal Value + Final Year FCF) = Terminal Value * Discount Rate – Final Year FCF
FCF Growth Rate =
(Terminal Value * Discount Rate – Final Year FCF)
(Terminal Value + Final Year FCF)